Ripple judge declares certain XRP token sales by cryptocurrency companies not subject to securities laws, marking a court victory.
In a significant legal win for cryptocurrency companies pushing back against U.S. regulatory oversight, Ripple Labs, the blockchain payment firm, received a landmark ruling from a federal judge on Thursday.
U.S. District Judge Analisa Torres in New York determined that certain digital token sales conducted by Ripple were not in violation of securities laws, contrary to the allegations made by the U.S. Securities and Exchange Commission (SEC). The SEC had sued Ripple Labs for allegedly conducting an unregistered offering of $1.3 billion worth of XRP between 2013 and 2020.
Judge Torres Exempts Ripple’s Sales To Retail Investors From Securities Classification
Judge Torres’ ruling specified that Ripple’s sales on public exchanges to retail investors did not qualify as securities offerings under the law. She justified her decision by pointing out that purchasers of XRP tokens did not have a reasonable expectation of profit tied to Ripple’s efforts.
According to the judge, these sales were characterized as “blind bid/ask transactions,” whereby buyers were unaware if their payments went directly to Ripple or any other XRP seller.
This legal victory represents a significant milestone for Ripple Labs and is considered the most substantial success for a cryptocurrency company in a case brought by the SEC. However, the ruling wasn’t entirely in Ripple’s favor, as Judge Torres also concluded that Ripple violated securities laws when it sold XRP directly to sophisticated investors like hedge funds.
The U.S. Securities and Exchange Commission (SEC) has been actively taking regulatory measures against multiple cryptocurrency companies, initiating more than 100 enforcement actions and asserting that digital assets should be categorized as securities. One prominent case pursued by the SEC this year revolved around Coinbase, the largest cryptocurrency platform in the United States.
The regulatory agency accused Coinbase of permitting users to trade at least 13 crypto assets that, according to the SEC, should have been registered as securities. These assets included tokens such as Solana, Cardano, and Polygon. Coinbase, however, refuted these claims.
Industry players have consistently contested the SEC’s assertion, stating that most cryptocurrencies, operating on a blockchain network shared across computers, do not meet the legal definition of securities in the United States. They have criticized the SEC for its perceived lack of clarity and inconsistency and have called for the establishment of new regulations or laws in the crypto space.
SEC Asserts Cryptocurrency Assets As Securities, Citing Precedent From 1946 Supreme Court Case
According to the SEC, cryptocurrency assets are considered securities under U.S. law. This argument is based on a precedent set by a 1946 U.S. Supreme Court case involving investors in Florida orange groves, which were owned by the W. J. Howey Co.
In that case, the court established that when individuals invest money in a common enterprise and expect profits solely from the efforts of others, it qualifies as an investment contract and falls under the category of securities.
As a result, the SEC asserts its jurisdiction to prevent similar offerings, like those conducted by Howey, from selling fractional land interests accompanied by profit-sharing contracts to out-of-state investors.
Prior to the Ripple decision, judges in a handful of crypto-related cases had sided with the SEC, ruling that specific digital assets were indeed securities. These judgments were based on developers’ statements that tied the value of their crypto assets to the growth or maintenance of associated blockchain systems, implying that investor profits relied on the “efforts of others.”
Additionally, courts determined that investors participated in a “common enterprise” due to their pooled funds being utilized by token issuers to develop relevant systems.
According to Carol Goforth, a law professor at the University of Arkansas, investor profits from Bitcoin are not reliant on the efforts of developers or managers. Some blockchain projects have attempted to navigate the regulatory landscape by conducting two-stage funding processes.
These projects initially offer securities under SEC regulations and subsequently provide or sell cryptocurrency to those investors once a functional blockchain has been developed. Goforth noted that developers pursued this strategy in the hopes of removing the “common enterprise” element.
However, she highlighted the SEC’s failure to clarify the requirements for converting a security into a non-security, leaving some ambiguity in the industry.
The court ruling in favor of Ripple Labs marks a significant development in the ongoing debate over the classification of crypto assets as securities in the United States.
As the SEC continues its enforcement actions and the cryptocurrency industry calls for clearer regulations, the legal landscape surrounding digital assets remains complex and subject to ongoing scrutiny.